Indian Economy Hey Ram.jpg

Indian Economy: “Hey Ram”

Newspaper: Avenue Mail

Date: 11th June, 2021

Last week the annual Gross Domestic Product (GDP) numbers of 2020-21 were released by the Government of India. GDP is a financial measurement that calculates a country's economic output. GDP is the barometer by which one can gauge the growth and prosperity of a country’s economy and the general standard of living in that country. Apart from respective data released by governments, the World Bank and rating agencies like Moody’s, Standard & Poor, Credit Suisse release economic analysis and project GDP growth outlook for the next few years country-wise.

India's gross domestic product declined at -7.3% for the entire fiscal year of 2020-21 and was at a meager growth of 1.6% in the January-March quarter of the fiscal year 2020-21. The last time the Indian GDP growth shrunk at this pace was in 1979-80 under Prime Minister Chaudhary Charan Singh when the Indian economy reduced by 5.2%. The dismal figures were partly to blame due to the first wave of the unexpected Covid-19 pandemic which derailed the robust economic plan outlined by the government during the budget presentation in February 2020. In the first quarter of the fiscal quarter of 2020, India de-grew by an unprecedented -23.9% as the Covid graph started to explode, and a national lockdown was announced on 22nd March 2020. The ease of lockdowns just before Diwali 2020 helped the GDP revive but the growth of 1.6% in Q4 has worryingly indicators for the Indian economy.

The emergence of Covid is only part of the problem. The Indian economy has been on a steady decline since the introduction of demonetization in November 2016. If 2016-17 fiscal year delivered a robust growth of 8.26%, 2017-18 registered a growth of 7.04%, a decline of 1.22% which can be partly attributed to the braking of the Indian economic juggernaut by demonetization, which made the country cashless for months, rendering the poor penniless and wiping a large portion of small-scale industries into oblivion. In 2018-19, the economy grew by 6.12% delivering a decline of 0.92%. The economy recorded a dismal growth of 4.2% in 2019-20 which knocked off almost 2% (1.92%) of the Indian GDP over the previous year. The contracting economy of 2020-21 registered a decline of -7.3%, which in effect is a de-growth of -15.56% since 2016-17 which is a mind-boggling reduction in Indian GDP growth.

As per the Centre for Monitoring of the Indian Economy (CMIE), the unemployment rate touched 14.5% in the week ended May 16, 2021. In the week ended May 23rd, 2021, it was even higher at 14.7%. Earlier, in the week ended May 9, it was 8.7%. The last two weeks have seen a sudden spike in the unemployment rate. There is a sharp rise in unemployment with almost 15 million jobs lost in May 2021 alone and 10 million jobs lost from January- April 2021, making it a total of 25 million jobs lost in 2021. At the same time, over 10 million people enter the workforce every year when there is no growth in jobs.

A double whammy ensued this deluge, as per the CMIE, 97% of households' incomes have declined since the beginning of the pandemic last year which coincided with reports of reduction in government spending in 2021. Under Prime Minister Manmohan Singh, 270 million people were elevated from poverty from 2004-2014, however, as per estimates, 240 million people have fallen back into poverty in the last year, in effect neutralizing the hard work done from 2004 to 2014. Incentivising below poverty line citizens must be a priority. Ensuring food and rations till Diwali will not be enough. Rural schemes like MNREGA must be enhanced to provide rural employment to push up incomes.

Indian customer consumption story has grown by a dismal 3%. The purchasing power of the poor and the lower middle class has shaken up due to the impact of Covid-19. The collapse of Indian consumer sentiment and the fall in real income has impacted the Indian economy. As per the CMIE, “India’s private final consumption expenditure (PFCE) declined by six% in nominal terms to Rs.115.7 trillion in 2020-21 from Rs.123.1 trillion in 2019-20. Consumption expenditure growth has been slowing through the last decade. A sharp fall in PFCE also indicates a fall in the standard of living of people of India in general and, a possible rise in poverty. A return to earlier PFCE levels would require growth to accelerate and employment and household incomes to rise. But this is a significant challenge. The recent fall in per capita real PFCE is so steep that India needs to catch up from its levels three years ago.”

On the fiscal deficit front, as per the CMIE based on a report of the Business Standard “The government’s fiscal deficit for 2020-21 is expected to be around 9s% of GDP as compared to the revised estimate (RE) of 9.5%. In February 2021, the government had revised the fiscal deficit projections for 2020-21 to Rs.18.5 trillion or 9.5% of GDP from the budget estimate of Rs.8 trillion or 3.5% of GDP, mainly on account of additional outgo to deal with the pandemic.” The fiscal deficit was proposed to be capped at 6.8% of the GDP as per the budget and the estimates show India is way off by 2.6% which is unhealthy for the economy. The news is not happy about inflation either. In May 2021, inflation rose to 5.30% from the lows of 4.29% in the previous month owing to rising food and crude prices.

Several solutions can be explored by the government to revive the economy. First things first. In the present circumstances, the first action to save the economy is to vaccinate, vaccinate and vaccinate! There is no option but to vaccinate the 1.36 billion population at a speed of 10 million people a day. Without vaccination, there is a lurking danger of a monstrous 3rd wave of Covid-19 which can derail the economy completely. Without vaccination, the economy will take more time to return to its former glory days. Normalizing the country to pre Covid levels is no more a choice but a war level urgency.

Whenever there has been a crisis, democratic governments always rely on past Presidents and Prime Ministers to consult and take their guidance on wars, financial catastrophes, or legislation. We have two living ex-Prime Ministers, Dr. Manmohan Singh and H.D. Deve Gowda to provide their wise counsel to the government on the course of action to be taken, especially Dr. Singh who has steered India safely during the Indian financial crisis of 1991 and the global financial crisis of 2008-10.

Since consumer confidence, sentiment and consumption are sinking, government spending must go up substantially. Putting money into the pockets of people will rebound the Indian economy like no other. The income tax cuts for the salaried middle class which are overdue by 7 years will provide a huge motivation for people to spend again. Though small but reducing the 20%-30% tax bracket of high-income salaried people by 5%-7% will provide a huge impetus on spending.

Fiscal stimulus to medium, small businesses, and MSMEs with tax benefits and monetary support will provide the cushion of support to millions of people who not only own but also work in small establishments in the corporate and non-corporate sector. A job mela for Government and non-government jobs need to be opened up in cities and towns as a national campaign for millions of jobless youths to apply and enter the workforce which in turn will help increased taxes. The scale, zeal and passion with which election rallies are organised in India, is the passion we need to organise job melas.

Reducing home loan rates to 4% and education loans to 2% will be radical but boost customers to spend on buying houses that can revive the real estate industry and also push more students to not drop pursuing higher education but find it easy to fund their higher education.

In a fantastic interview given by ex-Governor of the Reserve Bank of India and Professor of Finance at the University of Chicago, Raghuram Rajan spoke to Karan Thapar for The Wire on 4th of June 2021, where he presented a grim picture of the reality of the Indian economy and provided credible solutions to the government to focus on including hyperactive vaccination, decentralization of power and the opening of government spending. Ex-Finance Minister P. Chidambaram in his passionate article in the Economic Times has argued a whole set of immediate solutions that can be explored to rebound the Indian economy.

While the World Bank has cut India's GDP growth forecast for 2021-22 to 8.3% from 10.1% and rating agency Crisil has downgraded India's GDP forecast for 2021-22 to 9.5%, India needs a leader with a vision to lead the country to its pervious glory.